U.S. earnings outlook jumps to six-year high on tax cuts

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Wall Street doesn’t think corporate America will have a hard time coming up with those employee bonuses that were promised after taxes were slashed.

The December passage of the tax overhaul package and West Texas Intermediate crude’s breach of $60 a barrel have propelled the S&P 500 three-month earnings estimate revision ratio to its highest level since 2011, according to Bank of America Merrill Lynch.

That means the number of S&P 500 constituents who saw their “bottom-up” profit estimates rise from October to December exceeded those whose were trimmed by 25%.

The jump in this ratio -- the largest in more than five years -- “continues to suggest strong near-term S&P 500 returns,” BofA’s head of U.S. equity and quantitative strategist, Savita Subramanian, wrote in a note Monday.

And there’s a broader, more entrenched force underlying the positive outlook for U.S. firms.

“We’re more enthusiastic about the improvement in top-line trends,” the strategist said. “The three-month sales forecast revision ratio (SRR) improved for the fourth consecutive month to 1.60 from 1.57,” and is at its highest level in over six years, she said, “well above its long-term average of 0.98.”

Even amid this buoyant earnings outlook, the spread between the sales and earnings ratio revision ratios is near a seven-year high, Subramanian added. That’s spurring companies to say they plan to boost capital spending to take advantage of firming demand.

Bloomberg News
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